November 25, 2021
Like Hawaii and post-Brexit Britain, Israel is expensive because it’s an island economy, located far from its trading partners. That’s not going to change any time soon.
One of the latest hot-button issues in Israel is the government Competition Authority’s investigation into possible price-fixing by two of the country’s largest supermarket chains, Shufersal and Rami Levy. Politicians and journalists are blaming the chains for the high cost of living in Israel. But while it is human nature to look for a scapegoat, the supermarkets are not the source of that problem.
In 2020, Shufersal had revenues of NIS 15.2 billion ($4.9 billion), and Rami Levy 6.46 billion ($2.1 billion). Net revenue as a percent of total revenue was 2.5 percent for Shufersal and 2.7 percent for Rami Levi. Profits in the global grocery industry are thin, averaging about 2 to 3 percent, and the two Israeli chains in question are at the industry average. If they were gouging consumers, one would expect them to have higher profit margins.
A favorite variation on the high-cost-of-living topic is to compare the cost of living in Israel with that of the US prices for many consumer goods are much lower in the US due to the country’s massive population of 330 million. With a market of that size, manufacturers can achieve levels of mass production that no Israeli firm can. Further, in the US, goods travel from factory to market by train or truck, allowing factories to reach customers thousands of miles away at a minimal cost. Israel imports its goods from Europe, Asia, and North and South America either by plane or ship; trains and trucks are much cheaper modes of transportation.
A more appropriate comparison for Israel is the state of Hawaii – which is located 4,000 kilometers (2,485 miles) from the continental US. Everything is transported into or out of Hawaii by ship or plane. The average price of a home is $375,000 in the continental US, but $870,000 in Hawaii. The average loaf of white bread is $5.75 (NIS 17.82) in Hawaii and $1.54 on the continent.
It may well be that the major supermarket chains in Israel charge a bit more than they should, but with net profits of 2.5 – 2.7 percent of total revenue, that is not what is contributing to the high cost of living. Israel, like Hawaii, is an island economy. The country does not trade with its immediate neighbors but rather with Europe (3,000 kilometers/1,864 miles away), the US (9,500 kilometers/5,903 miles), and Asia (12,800 kilometers/7,954 miles). Also, like Hawaii, Israel has a limited amount of land for a growing population, making land prices high and rising as the population increases.
Reducing trading costs with Israel’s trading partners might be one way of reducing cost of living. Yet Israel may have already done as much as it can. In an earlier period, Israel was concerned with protecting its domestic industries, so it imposed high import duties on products from trading partners. However, over the past 20 plus years, Israel has signed free trade agreements with most, if not all of its major trading partners. Israel today has 14 free trade agreements covering 48 countries, including the US, EU, EFTA, and MERCOSUR. The Jewish state is also currently negotiating agreements with India and China.
Free trade agreements mean that trade between the countries is exempt (completely or partially) from import duties, which have the effect of raising prices for consumers. Israel already has the world essentially covered through these agreements. The one thing Israel cannot reduce is distance between markets and the costs associated with that distance. If Israel were to trade with its immediate neighbors, allowing transportation by trucks and trains, it could reduce costs further. But most of Israel’s immediate neighbors do not produce what the country buys and do not buy what the country produces, so a comprehensive peace agreement would not have an immediate impact on Israelis’ cost of living.
The UK, due to Brexit, is about to join Israel as an island economy, and with it a high cost of living. With Brexit, England is moving in the opposite direction as Israel by exiting the EU and the trade advantages that come with it. By observing the consequences of Brexit, Israel can better understand the advantages of its free trade agreements. Distance, however, remains the main obstacle.
Blaming supermarket chains may make Israelis feel better, but it will not solve their cost-of-living problem. Israel has an island economy, located far from its trading partners. It has free trade agreements with most of the developed world and even some of the developing world. There is not much left for Israel to do but to learn to live with these circumstances. And looking around both in Israel and its neighborhood, Israelis are living quite well.
By: Michael Humphries
Michael Humphries teaches marketing and management at the Jerusalem College of Technology and is deputy chairman of the Business Administration Department at Touro College Israel, where he teaches finance.